Key Take-Aways from Today’s Monetary Policy Report

Today’s semi-annual testimony by Fed Chair Yellen includes a prepared statement, a 56-page report, and intensive questioning from members of the House Financial Services Committee (followed by additional questioning tomorrow from the Senate.) At this juncture, the Fed is still data-dependent. It is too soon to tell whether additional policy tightening will prove necessary, particularly in the second half of the year, even as the financial markets have decided otherwise.

Some of the key take-aways:

On the CRE market:

"Of note, demand for commercial real estate (CRE) loans strengthened further and issuance of commercial mortgage-backed securities (CMBS) remained robust. Credit conditions tightened for this sector as concerns about credit quality led to wider spreads on CMBS and…a moderate number of banks had tightened lending standards for CRE loans, particularly for construction and land development. A modest fraction of banks also reported having tightened lending standards for commercial and industrial loans to firms of all sizes since the second quarter."

On financial conditions:

"Domestic financial conditions for nonfinancial firms have become somewhat less supportive of growth since last June, particularly for non-investment-grade firms. Equity prices have declined and bond spreads have widened amid concerns about the global economic outlook and oil prices. Downgrades of bonds issued by nonfinancial companies have increased, and the leverage of these companies is near the top end of its range over the past few decades. Nonetheless, profitability has remained high outside the energy sector."

On the labor market:

"While labor market conditions have improved substantially, there is still room for further sustainable improvement."

On financial conditions:

"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar."

On developments abroad:

"Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further."

On why the neutral Fed Funds rate has fallen:

"The low level of the neutral federal funds rate may be partially attributable to a range of persistent economic headwinds--such as limited access to credit for some borrowers, weak growth abroad, and a significant appreciation of the dollar--that have weighed on aggregate demand."

On the impact of U.S. dollar appreciation:

On spending and wealth:

“Consumer spending last year was also likely supported by further increases in household net worth. Although the value of corporate equities edged down last year, prices of houses—which are owned much more widely than are corporate equities—posted significant gains, and the wealth-to-income ratio remained elevated relative to its historical average.”

On housing:

"In nominal terms, national house price indexes are now close to their peaks of the mid-2000s, but relative to rents, house price valuations are much lower than a decade ago" [even as mortgage rates are near cycle-lows.]